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Featured case: Ferrari: Valuing the Prancing Horse

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The case

Who – the protagonist

The Ferrari management team. As noted in the case, the decision to go public was a very divisive issue inside the company. Many believed, both inside and outside of Ferrari, that being publicly traded was inconsistent with the company ethos. Ferrari’s longtime chairman, Luca De Montezemolo, had suddenly left in early 2015, reportedly over his opposition to the plan.

What?

Ferrari is an Italian manufacturer of iconic sports cars. A low-volume production strategy pursued by the company maintains its reputation for exclusivity and scarcity. Ferrari was considered the world’s most powerful brand, but not necessarily the most valuable.

Why?

Ferrari’s aim was to achieve profitable growth by pursuing ‘controlled growth in developed and emerging markets’. One of the drawbacks associated with going public was that the capital raised was not targeted at reinvestment into the business, but to compensate existing owner, Fiat, for reducing its interest. Ferrari also had no plans to offer dividends, so its value proposition relied exclusively on hoped-for capital gains. Investors would expect double-digit rates of return.

When?

Scuderia Ferrari was founded by Enzo Ferrari in 1929. A partnership was formed with Fiat Group in 1969. Fiat’s interest rose to 90% by 1988. The company was publicly launched on 20 October 2015 with shares priced at $52. The total raised was $923 million.

Where?

Ferrari was originally based in Modena, Italy. Its headquarters are now in Maranello, Italy, with a legal HQ in Amsterdam.

Key quote

‘There comes a point when exclusivity, if it becomes unreachable, is no longer exclusivity, it’s like reading a fiction novel … let’s not fool ourselves, we are in the business of selling cars to people.’ – Sergio Marchionne, CEO, Ferrari

What next?

The expression ‘horse trading’ has long meant that negotiating the price of anything – including a horse – is complicated, and determining the true value of anything is very difficult. After 12 weeks of public trading, Ferrari’s share price had slid nearly 30%. Was Ferrari, as many analysts suggested, a one-trick pony? Had the market seen the trick?

Download the case and teaching note

Michael H. Moffett

Michael discusses the difficulty of valuing a brand and the constant pressure faced by many business professionals to estimate future sales volumes and pricing.

Brand value

I don’t know if it's ‘impossible’ to understand the value of a brand, but it is certainly difficult. Clearly, for Ferrari, one of the most critical factors is scarcity. Ferrari’s own leadership believes that in order for it to continue to demand the premium prices it garners in the automobile market, it must remain a relatively scarce product. Ferrari’s CEO and prospectus reiterated their commitment to controlled volume sales in order to preserve the relative scarcity of its product.

Scarcity and valuation

It is Ferrari’s own commitment to scarcity that makes it interesting as the subject for valuation study. Publicly traded companies must grow – period. They need to consistently grow the bottom-line (earnings) over time in the hope of driving their share price up, and that, in turn, requires the consistent growth of top-line (revenues).

For Ferrari, this poses a bit of a special problem. Most luxury goods producers like Gucci or LVMH or Prada will consistently introduce new products across a wide array of market segments. Although they maintain price discipline (premium pricing) and access restrictions (limited retail distribution), they do not typically declare their commitment to a restricted volume of sales per period like Ferrari has done. And in comparison, Ferrari is rather limited in its ability to launch other products that don’t cannibalise its core value proposition.

Sexier than a washing machine

Because this case is about a luxury car brand it does make it more appealing to students. I recently wrote a case about an appliance manufacturer and in comparison, Ferrari is certainly much sexier than a washing machine or clothes dryer. However, the educational objective is the same for both – to understand the product and market outlook for earnings and cash flows over time.

Constant pressure

Many professionals, including brand managers, channel marketers, equity analysts, and others, are under constant pressure to estimate for a variety of purposes future sales volumes and pricing and analysing the market’s likely reception of that product’s value proposition. That’s business – and it requires both vision and detail.

Learning objectives

The primary objective of the case is to help students learn principles and practices of valuation. This is pursued through both discounted cash flow analysis and market multiples – both common practices in business that business professionals are expected to understand, and in many cases, master.

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